Part of Our EU-27 Green Tax Wiki

Introduction to Green Bond Initiatives in the European Union

Currently there are not any initiatives set in place to encourage the purchasing of green bonds in the EU, however this will hopefully change by May 2020. The European Commission in July 2018, created the Technical Expert Group in Sustainable Finance (TEG) to come up with a green bond initiative within the EU (3). Since the establishment of TEG, a year later the group published its Report on EU Green Bond Standard (4). The report outlines numerous additions to the current minimalistic sustainability finance framework in place today which does not include any green bond initiatives. These changes are set to be evaluated by the European Commission between March and May 2020.

The goal of the Technical Expert Group in Sustainable Finance is to develop a strong framework and foundation to increase the flow of capital towards EU’s environmental objectives (6). TEG is proposing the EU Green Bond Standard with the aim to create a credible, transparent and effective green bond market. If report is approved and implemented, green bond should further increase their share in the bond market (5). In recent years, green bond’s share has increased about 50% year over year, however this is largely due to green bond policies set forth by the United States (6).

Bonds Overview

Bonds are fixed-income instruments with low risk relative to other investments. Borrowers issue the bond to a lender for the purpose of raising capital during a specified time frame. The borrower pays the lender interest in the form of a coupon payment determined by the interest rate of the bond. Once the bond matures, at the end of the specific time period, the borrow also pays the face value or principle amount of the bond (1).

These debt securities are attractive to investors due to their low risk. Companies and government municipalizes issue bonds to investors looking to make a return specified by the bond’s interest rate. This return is based on the riskiness of the borrowing entity (1). For example, large, stable governments, such as the United States, issue bonds with low rates, while medium sized companies who need to raise money to pay off debtors issue bonds with much higher rates.

Green Bonds Overview and Purpose

Green bonds were created to offer financing solutions for sustainability and environment-related projects. These projects promote technology which reduces climate change and is environmentally safe. Examples of projects are clean water initiatives, pollution mitigation and protection of different ecosystems (2). To encourage the purchasing of these fixed-income instruments, tax incentives are put in place to catch the attention of investors who do not typically help raise money for sustainability projects.

The Technical Expert Group in Sustainable Finance defines green bonds as, “any type of listed or unlisted bond or capital market debt instrument issued by a European or international issuer that is aligned with the EU Green Bond Standard” (5).

Green Bonds Project Criteria as Specified by TEG

The Technical Expert Group in Sustainable Finance stated in their proposed report that any company, regardless of industry and mission, may issue green bonds to finance their “green projects” (6). For a project to be classified to as green project it must meet four criteria set forth by EU taxonomy. This EU taxonomy is simply a classification system designating economic activities and projects as “green” (7). The following are the criteria:

The project must contribute to one of the following environmental objectives of the EU Taxonomy Regulation:
1. Climate change mitigation
2. Climate change adaption
3. Sustainable use and protection of water and marine resources
4. Transition to the circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems.
The project may not damage the progress of any of the stated objectives.
The project must meet all the minimum safeguards.
The project must comply with Technical Screening Criteria (6).

Project Reporting Guidelines

For a company’s project to be certified by the green bond standard it must meet allocating and impact reporting guidelines stated in TEG’s report (6). These standards are put in place to allow transparency regarding the project’s purpose and status. The frequent reporting necessary to be part of the green bond standard include quantitative measurements for investors to easily track the progress of green projects they are invested in. These reports are required a minimum of once a year, but encourage companies to report much more frequently (6). The purpose of these reporting guidelines is to create full transparency between the company’s progress and the investors. Similar to how public companies must report quarterly and annual financial reports, these companies must report the progress of their projects.

How the Green Bond Standard Benefits Issuers and Investors

The greatest benefit to issuers of green bonds who choose to adhere to this green bond voluntary standard is the increase in their bonds credibility. By following reporting guidelines and having their bonds be classified through this standard as quality green bonds, investors are more likely to purchase the bonds (7). This will help companies raise capital for green projects easier, even if it does involve more reporting busy work for the issuers.

This new standard (if passed) will also attract new investors to the green bond market (7). These debt securities can be seen as more credible once they are verified under the green bond standard. Investors will be provided adequate reporting of these green project’s progress and those looking to diversify their portfolios will be able to confidently add a new fixed income instrument to their portolio.

Conclusion

Overall, this standard was proposed with the purpose of creating a more credible green bond market in the EU. One where investors can be confident in their investments and companies can have the opportunity to raise capital for green projects. This is just a start for the EU’s sustainable financing goals and this standard, if passed, will be the framework for green efforts made in the future.

Works Cited